## 1. Fiscal Frameworks for Resource-Rich Countries (_082412) ## Source details **Canonical URL:** [1. Fiscal Frameworks for Resource-Rich Countries (_082412)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_082412.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_082412.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_082412.pdf.json) --- ### I. Motivation, objectives, and key innovations - Exhaustible natural resources create intertemporal choices on consumption versus saving with implications for intergenerational equity and fiscal/external sustainability. - Revenue volatility requires distinct medium-term fiscal rules and precautionary savings. - Distinctive RRDC characteristics affecting policy design: - Low per capita incomes, limited access to international capital markets, and scarcity of domestic capital. - Returns on domestic investment projects likely higher than returns to international financial assets, arguing for domestic investment subject to absorptive capacity constraints. - Low current incomes may justify tilting consumption toward relatively poorer current generations. - Fundamental objective: transform depleting resource wealth into a portfolio of other assets (human capital, domestic public and private capital, foreign financial assets). - Paper goals: - Utilize and extend consumption-savings/investment analytical frameworks for fiscal and external sector assessments. - Analyze short- to medium-term fiscal rules and resource fund management to manage revenue volatility and short-run macro policies. - Compare macro performance of RRDCs with non-resource-rich peers and draw lessons from Fund engagement. - Develop new macro-fiscal frameworks and policy analysis tools for RRDCs. ### Stylized facts and performance issues - Definition used: “Resource-rich developing countries” = LICs and LMICs whose exhaustible natural resources comprised at least 20 percent of total exports or 20 percent of natural resource revenues, based on a 2006-10 average. - Key stylized facts: - Many RRDCs have not closed infrastructure gaps despite resource abundance. - Volatility in resource flows has contributed to boom-bust cycles and mixed socioeconomic outcomes. - Some RRDCs have saved relatively little of resource flows; some have negative “genuine” savings. - Public investment rates increased during recent resource boom but investment quality suffers from weak capacity. - Volatility harms macroeconomic performance and growth; fiscal policy has been more procyclical in RRDCs than in comparators, though procyclicality diminished somewhat in the recent boom. - Empirical notes: - Analysis based on a sample of 29 RRDCs and a comparator sample of 64 developing countries. - Real GDP per capita growth: until recently growth in RRDCs has been lower than in non-resource economies. ### Link between long-run sustainability and short-term volatility management - Two key policy features to avoid common problems: - High proportion of resource revenue should go to savings and domestic investment. - Smooth consumption/current spending and delink it from resource revenue dynamics to avoid boom-bust cycles. - Short- to medium-term fiscal targets should be informed by long-term fiscal sustainability frameworks—determine appropriate public investment path and smooth government consumption conditional on expected resource revenue. - Resource horizon uncertainty: - Long-lasting reserves: exhaustibility less central but borrowing sustainability relevant. - Uncertain horizons: consider ranges of alternative scenarios and frequent updates. - Short horizons: lock in high savings rates and devote a significant share of savings to domestic investment as absorptive capacity improves. ### Identified gaps in Fund advice and five key innovations proposed - Weaknesses in prior Fund approach: - Inadequacies of the Permanent Income Hypothesis (PIH) for RRDCs: silent on desirable investment dynamics (domestic vs. foreign). - Policy discussion often did not distinguish consumption (current) from investment (capital). - Insufficient attention to managing volatile resource revenues; volatility of total expenditure is over 60 percent higher in resource-rich countries than in comparators. - Five key innovations: - New long-term fiscal sustainability framework accounting for growth- and revenue-enhancing impact of investment, providing a long-run benchmark for the non-resource primary balance (NRPB) that gradually draws down net (financial and resource) wealth and stabilizes it at a lower level than with the PIH. - Sustainable-investing tool to analyze macroeconomic and fiscal implications of different saving/investment scaling up scenarios, building in fiscal sustainability. - Complementary fiscal indicators for measuring growth in public investment and financial savings relative to resource revenue growth for RRDC staff reports. - Toolkit to facilitate practical design of fiscal rules to smooth short-term revenue volatility and assess long-term fiscal sustainability under different frameworks. - Framework generating current account benchmarks for external stability analysis based on a model with optimal investment decisions following exhaustible resource windfalls. ### II. Savings–investment analytics for RRDCs - Core policy question: how much resource flow to consume versus save/invest, and where to save/invest (domestic economy or foreign assets). - Trade-offs and considerations: - Some frontloading of consumption to benefit presently poor generations may be welfare improving. - High saving/investment rates are necessary for lasting development impact; scaling up domestic investment is typically part of an optimal strategy but may face absorptive capacity bottlenecks. - Volatility and uncertainty create a precautionary need for liquidity buffers. - Analytical focus: distinguish consumption (current spending) from investment (capital spending) and analyze allocation of resource wealth between domestic investment and foreign financial assets given capital scarcity and capacity limits. ### Frontloading consumption versus intergenerational smoothing - Future generations expected to have higher non-resource income; an additional “unit” of consumption for the present generation has a higher marginal utility. - PIH and bird-in-hand approaches are not optimal for typical RRDCs: - PIH: perfect consumption smoothing across generations (no frontloading). - Bird-in-hand: allows only interest income from already extracted resources to be consumed (backloads consumption). - Optimal to shift incremental consumption spending forward to benefit presently poorer generations. ### Optimal savings and investment from resource windfalls - To have a lasting development impact, part of natural resource revenues needs to be saved and invested. - Optimal savings rates are higher when returns on savings are higher and when the windfall is relatively short-lived. - Except for extreme examples, to have any permanent consumption increment as time-to-depletion nears, the savings rate would approach 100 percent of resource flows. - PIH: sustain a constant consumption flow equal to the implicit return on the present value of future resource revenue; limitations include ignoring heterogenous marginal utility, liquidity constraints, domestic investment, and uncertainty. ### Scaling up domestic investment and absorptive capacity constraints - Scaling up domestic investment financed by resource wealth is likely optimal for many RRDCs due to high domestic returns and limited external capital access. - Microeconomic bottlenecks: weak project implementation, project selection, and budgeting reduce investment efficiency. - Short- to medium-term constraints: - Supply bottlenecks push up prices of non-traded goods, creating inflationary pressures and possible Dutch disease. - Delayed domestic output response due to installing non-traded capital. - If bottlenecks are a concern, advisable policies: - Gradual approach and save more of the windfall in financial assets temporarily. - Temper non-traded consumption while building domestic capital stock. - Park more windfall in a foreign asset development fund while building domestic capacity. - “Invest in investment” — build capacity to manage investment and scale up public investment gradually. - Sustainable investing minimizes commodity price volatility impacts, mitigates Dutch disease, and reduces costs of absorptive constraints. ### Political economy, institutions, and fiscal commitments - Sound institutions are crucial to avoid rent-seeking, corruption, and dissipation of savings. - Political economy challenges include the “voracity effect,” pressures to earmark investments locally, and off-budget resource-for-infrastructure deals. - Governments need commitment mechanisms (institutionalized savings rules) to preserve savings across administrations. - RRDC-tailored fiscal frameworks and improved public investment management should be part of continuous institutional building. ### Dealing with uncertainty and volatility in commodity revenues - Commodity price swings can be large, long-lasting, and asymmetric, making forecasting difficult and motivating precautionary savings. - Optimal liquidity buffer size increases when: - Revenue volatility is high and persistent. - Society is more prudent. - Consumption out of resource revenue is higher. - Full self-insurance can be expensive; a pragmatic approach assesses buffers based on tolerable tail-risk (Value-at-Risk, VaR) or model-based approaches. - Market-based instruments (forwards, options) exist but are under-utilized due to complexity and cost. - Uncertainty in investment returns matters; low or negative risk-adjusted returns may slow investment ramp-up and prompt safer asset choices or debt repayment. - Holistic approach: balance consumption and savings, set precautionary buffers, and use additional savings for debt reduction, domestic investment, or external financial assets depending on absorptive capacity. ### Approaches to assess stabilization buffer adequacy - Value-at-Risk (VaR) approach: - Estimates minimum required stabilization buffer to absorb tail risk with a given confidence level over the forecast horizon. - Buffer size depends on stochastic properties of revenue volatility, forecast horizon, desired confidence level, and fund inflow/outflow rules. - Example: Republic of Congo — an 8-year moving average of oil prices (5 historical years and 3 years forward projection) strikes a reasonable balance. - VaR applied to Nigeria by Bartsch (2006). - DSGE model-based approach: - Links fiscal policy and macroeconomy to determine confidence that a spending path can be maintained given resource revenue volatility, accounting for macro feedback effects. - Application to Angola: aggressive investment scaling that builds a smaller stabilization fund yields about a 30 percent probability that the fund is inadequate to prevent future spending cuts and worse non-oil GDP outcomes. - More public investment can increase non-oil growth but imply less stabilization savings, leaving spending vulnerable to shocks; however, investment can generate fiscal space by increasing non-resource revenue. ### Fiscal framework indicators and anchors - Fiscal frameworks should: - Include additional indicators on resource use. - Adopt fiscal rules to manage short-term price volatility. - Establish fiscal sustainability benchmarks. - Policy emphasis by reserve horizon: - Long reserve horizons: focus on managing revenue volatility and avoiding procyclicality. - Short reserve horizons: benchmark for fiscal sustainability that accounts for resource exhaustibility is key. - Non-resource primary balance (NRPB) is the key indicator for RRDCs with short reserve horizons: - Identifies government operations’ impact on domestic demand since resource revenues originate abroad. - Higher non-resource primary deficit indicates an expansionary fiscal stance. - NRPB helps delink fiscal policy from volatile resource revenues and links to sustainability frameworks in limited-reserve countries. - Advantages: excludes interest payments paid to non-residents; complements a non-resource overall balance when domestic interest payments are large. - For long-horizon RRDCs, targeting a structural primary balance (NRPB + structural component of resource revenues) is a useful complement to smooth expenditures. ### Non-resource primary balance rules: PIH and alternatives - Two PIH-consistent NRPB approaches: - Bird-in-hand: NRPB = real rate of return on accumulated financial assets. - Traditional PIH: NRPB consistent with accumulated and expected financial wealth treating in-ground resources as virtual financial wealth. - PIH is often too restrictive; alternatives needed to: - Allow scaling up of public investment relative to PIH. - Determine optimal paths for public investment and NRPBs based on absorptive capacity and cyclical position. - Tools: Dynamic stochastic general equilibrium models, financial programming, and the “FARI” cash flow model for resource revenue forecasting. ### Price-based smoothing rules: rationale and design tradeoffs - Price-based smoothing computes structural resource revenues and mitigates procyclicality. - Reference price determination options: automatic formula or independent committee. - Tradeoff in reference price horizon: - Short backward-looking horizons: better track price changes but more volatile spending envelopes. - Long backward-looking horizons: smoother expenditures but risk misalignment if price trends change. - Country examples: - Mongolia: 16-year moving average of mineral prices (past 12 years and projected current + next 3 years). - Mexico: weighted-average of a 10-year historical average (25 percent weight), short-term futures price (50 percent weight multiplied by prudence factor 0.84), and medium-term futures prices (25 percent). - Trinidad and Tobago: simple average of oil prices for last 5 years, current year, and futures for next 5 years. - Ghana: 7-year moving average including three projected years. - Price smoothing formulas can be implemented as fiscal rules or budgeting procedures; complementary policies needed for subsidies and other procyclical items. ### Price formula evaluation and financial buffers - Slow-moving average price formulas smooth expenditure but can create large discrepancies between projected and actual revenues. - Forecast errors generate excessive savings when prices rise fast or require larger buffers when prices decline unexpectedly. - Buffers need to be larger when resource dependency is higher. - Example: VaR simulations for the Republic of Congo suggest buffers may need to be sizable (e.g., 48 percent of non-oil GDP) to maintain a smooth government spending path over the medium term. ### Expenditure growth rules: design and trade-offs - Purpose: limit procyclicality, guide scaling up of public investment where absorptive capacity constraints exist, and smooth volatility when combined with price-based rules. - Formulation options: limit growth of government spending in nominal terms, real terms, or as percent of non-resource GDP. - Complementary frameworks: more effective when combined with overall balance or structural rules (e.g., Peru, Mongolia). - Implementation considerations: adjust limits based on absorptive capacity and treat priority growth-enhancing spending carefully. - Risks: incentives to reclassify recurrent as capital spending; many current outlays (education, health) have capital-like effects. ### Setting sustainability benchmarks: MPIH and FSF - Two longer-term approaches: - Modified Permanent Income Hypothesis (MPIH): allows front-loaded scaling up of investment by drawing down financial assets for a period, offset by future adjustment to rebuild assets to PIH levels; does not explicitly account for investment impact on growth and non-resource revenues. - Fiscal sustainability framework (FSF): explicitly incorporates the intertemporal budget constraint and ex ante expected impact of higher investment on growth and non-resource revenues; can allow drawdown of wealth to build capital and stabilize net wealth at a lower level than PIH. - Comparative guidance: - If productivity of public investment is highly uncertain: MPIH may be more prudent. - If confidence in positive investment impact: FSF is preferable. - Sustainable Investment Tool: - Determines how much and how fast public investment can be scaled up while ensuring long-run sustainability. - Accounts for inefficiencies, absorptive capacity, and O&M requirements. - For a given investment path and resource revenue envelope, assesses implied fiscal adjustments needed for debt sustainability. - Country applications: - Angola: gradual scaling up allows building stabilization fund buffer and improves absorptive capacity and investment efficiency. - Republic of Congo simulation: possible to scale up investment and stabilize government wealth post-scaling up at about 400 percent of non-oil GDP, lower than current levels and than under the PIH, yielding significantly higher per capita income growth. - Assessing public investment effectiveness: - Tools: Public Investment Management Index (PIMI); country-specific rate-of-return estimates; multilateral/bilateral project data. ### Selected quantitative indicators for Republic of Congo (as presented) - Period columns: 2017 2032 2017 2032 - Per Capita GDP (in U.S. dollars): 2,992 2,571 3,868 4,872 - Real GDP (annual percent change)1: -1.7 2.3 5.1 3.9 - Public Capital Spending (in percent non-oil GDP): 6.8 17.3 23.8 9.1 - Cumulative Capital Spending (in billions of U.S. dollars): 4.6 26.5 18.8 40.9 - Non-Resource Primary Balance (NRPB): -14.9 -14.9 -28.7 -3.5 - Net Financial Assets (in billions of U.S. dollars): 30.2 135.2 18.2 100.8 - Note: Data for 2017 report the average forecast of 2013-17, and 2032 report the average forecast of 2018-32. ### Building productive assets, indicators, and fiscal institutions - Certain current expenditures (education) can yield returns similar to public investment and should be prioritized in some RRDCs. - Some capital investments (hospitals, schools) require associated recurrent operations and maintenance. - For fragile states, spending on security and justice can have high growth returns. - Importance of non-resource tax policy and administration: rising resource revenues can create disincentives to mobilize non-resource revenue. - Two simple indicators to track resource revenue use: - (i) share of public investment in total spending (as percent of non-resource GDP), - (ii) ratio of increase in public investment to increase in resource revenues (as percent of non-resource GDP). - Fiscal institutions and legal design: - Robust PFM, well-specified natural resource funds, and independent forecasting bodies are important. - Best practice: be clear on objectives and reporting; avoid over-prescription that conflicts with macrofiscal objectives. - Managing natural resource funds: - Purposes: stabilization, savings, development. - Principles: funds are complementary to fiscal policy; flows should be derived from actual fiscal surpluses and integrated into the budget; asset-liability management should reflect liquidity, financing capacity, and buffer needs. - Rules flexibility: flexible inflow/outflow rules often more effective than fixed rules; withdrawal brakes can limit depletion (e.g., São Tomé and Príncipe limit withdrawals to a maximum of 20 percent of accumulated assets in any single year). - Design by capacity: where capacity is weak, use one fund with two portfolios (stabilization and savings/development); well-developed capacity may allow multiple funds but requires careful design. ### Short- and medium-term macroeconomic issues and policy coordination - Fiscal response determines short-run impulse from a windfall; broader effects depend on monetary and exchange rate responses, reserve accumulation, and monetary stance. - Fiscal response measured by extent of decrease in the NRPB in response to higher resource revenue. - Higher public spending on local goods/services expands sectors, can create inflationary pressures, and cause RER appreciation. - Fiscal smoothing rules can reduce aggregate demand and RER pressures. - Interaction with monetary and exchange rate policy: - In managed floats and fixed regimes, reserve accumulation and sterilization choices shape inflation, interest rates, and crowding in/out effects. - Non-sterilized interventions can add inflationary pressure; sterilized interventions can raise real interest rates and crowd out private sector. - Case study — Nigeria: - 2004–07: oil price-based rule and oil stabilization fund aided “limited spending, and significant reserve accumulation” with limited aggregate demand pressures and falling inflation. - 2009–10: breakdown of coordination led to “full spending and reserve loss”, higher inflation, and exchange rate depreciation pressures. - Financial sector and credit risks: - Windfalls may trigger credit booms, crowding in or out, and financial fragilities; supervision and regulation are key. ### Policy responses at onset of windfall and schematic outcomes - At onset: countries with high inflation/fiscal dominance may reduce central bank financing; weak buffers may build reserves; credit boom/bust risks call for careful response. - Composition and speed of spending: limited short-term spending helps contain demand; scaled-up public spending builds capital; high import content of infrastructure spending can mitigate domestic impacts. - Schematic policy response outcomes: - Full spending with limited reserves accumulation: RER appreciates, aggregate demand rises, domestic inflation offset by nominal appreciation, private demand positive. - Full spending with limited reserves and managed float/savings in central bank: RER appreciates, monetary financing reduced or real interest rates fall, no additional inflationary pressures, private sector crowded in. - Full sterilization (large reserve accumulation, active sterilization): real appreciation reduced, real interest rates increase, private sector crowded out, inflationary pressures rise. - No sterilization (fixed exchange rate, passive policy): RER appreciates via rise in inflation, aggregate demand pressures rise. ### External sector assessments and model-based CA benchmarks - Traditional PIH consumption-smoothing frameworks are inadequate for capital-scarce RRDCs because they omit investment decisions. - External sustainability (ES) approaches compute medium-term current account balance that stabilizes net foreign assets; new calibrated model-based approaches incorporate investment decisions and frictions. - Model structure: neoclassical small open economy with public and private investment, augmented by frictions—investment inefficiencies, absorptive capacity constraints, and borrowing limits. - Five illustrative scenarios: - (i) high international capital mobility (PIH-type benchmark) - (ii) low capital mobility due to external borrowing constraints - (iii) borrowing and absorptive capacity constraints - (iv) borrowing constraints that can be relaxed after resource windfalls - (v) an expected adverse shock to oil output - Model findings: - With external borrowing constrained, optimal response implies smaller CA surplus than PIH-type case; windfalls relax constraints, accelerating investments and boosting non-oil production. - With limited absorptive capacity, slower scaling up of investment is warranted, implying larger CA surpluses. - Expected adverse oil shocks justify higher buffer-stock savings and higher CA surpluses. - CEMAC application: calibrated benchmark CA has a surplus below ES approach because domestic returns exceed foreign asset interest rates, making domestic investment optimal. - Commodity price volatility implies precautionary savings, improving CA balance; accumulation of foreign-owned capital (FDI, royalties) can worsen CA. ### Lessons from Fund engagement and recommended policy priorities - Review of Fund documents: - PIH-based frameworks used in more than a third of RRDCs, especially those with high resource dependency. - Authorities’ projected spending often exceeded PIH-implied levels; few countries adhered to PIH; staff advocacy declining. - Only about half of RRDCs received Fund advice to introduce fiscal rules to smooth spending volatility. - Fund advice emphasized PFM and MTEFs; less emphasis on FRLs and resource funds. - Recommended priorities and instruments: - Transform subsoil resources into other assets; governments’ saving rates from resource revenues should be high and rise over time as resources are depleted. - Delink expenditure from volatile resource revenue and avoid procyclical fiscal policies. - FSF that accounts for growth impact of public investment is promising for long-run benchmarking of NRPB. - Scale up public investment sustainably while building capacity (PFM, project appraisal, monitoring, ex post evaluation). - Use the sustainable investment tool and complementary fiscal indicators to inform saving/investment decisions and measure how nonrenewable revenue is consumed or saved domestically versus abroad. - Non-resource balance and price-based fiscal rules are useful anchors; expenditure growth limits can act as complementary “speed bump” targets. - Use Excel templates, VaR analysis, and model-based tools to size precautionary fiscal buffers and analyze policy mixes. - Coordinate fiscal, monetary, and exchange rate policies to manage short-run macro impacts. - External sector assessments should incorporate public investment scaling and private investment impacts for CA and NFA analysis. ### Fund operational priorities, TA, and planned pilots - TTF (Topical Trust Fund) began 2011 supporting 50 LICs and LMICs in five capacity areas: (i) fiscal regime; (ii) revenue administration; (iii) macrofiscal policies and PFM; (iv) asset and liability management; (v) statistics. - Planned development and piloting: - Refine Excel templates for fiscal rules and pilot adaptations to country circumstances. - Calculate complementary fiscal indicators in country case studies and prepare operational guidelines. - Extend sustainable investing tool to allow borrowing financing; pilot additional country applications (notably for short reserve horizon cases); develop user-friendly front end and training. - Further country applications for external sustainability model and introduce uncertainty. - Examine absorptive capacity proxies and build a cross-country RRDC database. - Further analyze short-run macro management challenges, optimal stabilization fund size, and policy mixes. ### Issues for governance and discussion questions posed to Directors - Do Directors agree that RRDC characteristics make traditional consumption-saving frameworks inadequate? - Do Directors agree that RRDCs should save part of resource revenues in domestic real assets and aim for smooth current spending paths? - Do Directors agree that fiscal sustainability assessment is important for all RRDCs and critical for countries with short reserve horizons? - Do Directors support fiscal frameworks that delink government expenditure from externally-driven volatility? - Do Directors agree that resource funds should be transparently managed within an asset-liability framework integrated with the budget? - Do Directors agree that external sector assessments should account for scaling up public investment? ### Appendix: country groups and counts (as presented) - Resource-rich developing countries (29): Angola; Bolivia; Cameroon; Chad; Dem. Rep. of Congo; Rep. of Congo; Côte d’Ivoire; Equatorial Guinea; Gabon; Guinea; Guyana; Indonesia; Iraq; Lao PDR; Liberia; Mali; Mauritania; Mongolia; Niger; Nigeria; Papua New Guinea; Sudan; Syrian Arab Republic; Timor-Leste; Turkmenistan; Uzbekistan; Vietnam; Yemen; Zambia. - Comparison group (63): Afghanistan; Armenia; Bangladesh; Belize; Benin; Bhutan; Burkina Faso; Burundi; Cambodia; Cape Verde; Central African Republic; Comoros; Djibouti; Dominica; Egypt; El Salvador; Eritrea; Ethiopia; Fiji; The Gambia; Georgia; Ghana; Grenada; Guatemala; Guinea-Bissau; Haiti; Honduras; India; Kenya; Kiribati; Kyrgyz Republic; Lesotho; Madagascar; Malawi; Maldives; Moldova; Morocco; Mozambique; Myanmar; Nepal; Nicaragua; Pakistan; Paraguay; Philippines; Rwanda; Samoa; São Tomé and Príncipe; Senegal; Sierra Leone; Solomon Islands; Sri Lanka; St. Kitts and Nevis; St. Lucia; St. Vincent & Grenadines; Swaziland; Tajikistan; Tanzania; Togo; Tonga; Uganda; Ukraine; Vanuatu; Zimbabwe. *Source: _082412 - MACROECONOMIC POLICY FRAMEWORKS FOR RESOURCE-RICH DEVELOPING COUNTRIES (IMF chapter content provided).* ### 1. Fiscal Frameworks for Resource-Rich Countries _______________________________________________ 25 ### 1. Fiscal Frameworks for Resource-Rich Countries ### I. Motivation, objectives, and key innovations - Exhaustible natural resources offer vast opportunities for development; they account for a major share of export and government revenues in a rapidly growing number of resource-rich developing countries (RRDCs). - Two central challenges: - Resource exhaustibility creates intertemporal decisions on consumption versus saving with implications for intergenerational equity and fiscal/external sustainability. - Revenue volatility calls for distinct medium-term fiscal rules and precautionary savings. - Distinctive RRDC characteristics affecting policy design: - Low per capita incomes, limited access to international capital markets, and scarcity of domestic capital. - Capital scarcity and constrained capital market access imply returns on domestic investment projects are likely higher than returns to international financial assets, arguing for investment of resource wealth in domestic capital subject to absorptive capacity constraints. - Low current incomes may justify tilting consumption toward relatively poorer current generations. - Fundamental objective: transform depleting resource wealth into a portfolio of other assets (human capital, domestic public and private capital, foreign financial assets). Evidence shows poor record: resource richness has been associated with lower public capital stocks and lower “genuine” savings when accounting for resource depletion. - Paper goals: - Utilize and extend consumption-savings/investment analytical frameworks to derive implications for fiscal policy and external sector assessments. - Analyze short- to medium-term fiscal rules and resource fund management to manage revenue volatility, and implications for short-run macro policies. - Compare macro performance of RRDCs with non-resource-rich peers and draw lessons from Fund engagement. - Develop new macro-fiscal frameworks and policy analysis tools for RRDCs to enhance Fund policy advice. ### Stylized facts and performance issues - Definition used: “Resource-rich developing countries” = LICs and LMICs whose exhaustible natural resources comprised at least 20 percent of total exports or 20 percent of natural resource revenues, based on a 2006-10 average. - Key stylized facts (Box 1): - Many RRDCs have not closed infrastructure gaps and have large development needs despite resource abundance. - Volatility in resource flows has contributed to boom-bust cycles and mixed socioeconomic outcomes. - Some RRDCs have saved relatively little of resource flows; some have negative “genuine” savings (savings adjusted for depletion of natural resources). - Public investment rates increased during recent resource boom but investment quality suffers from weak capacity; in oil producers shares of investment and current spending did not change much in the recent boom. - Volatility harms macroeconomic performance and growth; fiscal policy has been more procyclical in RRDCs than in comparators, though procyclicality diminished somewhat in the recent boom. - Empirical notes: - Much of the analysis is based on a sample of 29 RRDCs and a comparator sample of 64 developing countries that are not rich in natural resources. - RRDCs face large infrastructure gaps; Figure 1 shows paved roads (median and interquartile range, in percent of total roads). - Real GDP per capita growth: until recently growth in RRDCs has been lower than in non-resource economies (Figure 2). ### Link between long-run sustainability and short-term volatility management - Two key policy features to avoid common problems: - High proportion of resource revenue should go to savings and domestic investment. - Smooth consumption/current spending and delink it from resource revenue dynamics to avoid boom-bust cycles. - Long-run considerations and revenue volatility must be linked: - Short- to medium-term fiscal targets should be informed by long-term fiscal sustainability frameworks—determine appropriate public investment path and smooth government consumption conditional on expected resource revenue (production and prices). - Fiscal rules can protect planned paths from actual revenue volatility; medium-term plans should be revised as expectations change. - Resource horizon uncertainty implies: - For countries with very long-lasting reserves, exhaustibility is less central but borrowing sustainability remains relevant. - Where reserve horizons are uncertain, adopt approaches that consider ranges of alternative scenarios and frequent updates; avoid assuming indefinite resource flows. - When reserve horizons appear short, intertemporal consumption/savings-investment decisions and fiscal sustainability must be priorities: lock in high savings rates and devote a significant share of savings to domestic investment as absorptive capacity improves. ### Identified gaps in Fund advice and key innovations recommended - Weaknesses in prior Fund approach: - Inadequacies of the Permanent Income Hypothesis (PIH) for RRDCs: PIH promotes smoothing but is silent on desirable investment dynamics (domestic vs. foreign) and thus on current account implications. - Policy discussion not focused on consumption versus savings/investment: standard frameworks applied PIH-like expenditure smoothing to total government spending without distinguishing consumption (current spending) and investment (capital spending). - Insufficient attention to managing volatile resource revenues: only about half of RRDCs received Fund advice focused on short- to medium-term fiscal rules to smooth revenue volatility; volatility of total expenditure is over 60 percent higher in resource-rich countries than in comparators. - Five key innovations proposed: - A new long-term fiscal sustainability framework that accounts for growth- and revenue-enhancing impact of investment, providing a long-run benchmark for the non-resource primary balance (NRPB) that gradually draws down net (financial and resource) wealth and stabilizes it at a lower level than with the PIH. - A sustainable-investing tool for RRDCs to analyze macroeconomic and fiscal implications of different saving/investment scaling up scenarios that also builds in fiscal sustainability. - Complementary fiscal indicators for measuring growth in public investment and financial savings in relation to growth in resource revenue to include in RRDC staff reports. - A new toolkit to facilitate practical design of fiscal rules to smooth short-term revenue volatility and to assess long-term fiscal sustainability under different frameworks. - A framework that generates current account benchmarks for analyzing external stability in RRDCs, based on a simple model with optimal investment decisions following exhaustible resource windfalls. ### II. Savings–investment analytics for RRDCs - Core policy question: how much resource flow to consume versus save/invest, and where to save/invest (domestic economy or foreign assets). - Trade-offs and considerations: - Some frontloading of consumption to benefit presently poor generations may be welfare improving. - High saving/investment rates are necessary for lasting development impact; scaling up domestic investment is typically part of optimal strategy but may encounter absorptive capacity bottlenecks. - Volatility and uncertainty of resource flows creates a precautionary need for liquidity buffers. - Analytical focus: distinguish consumption (current spending) from investment (capital spending) in fiscal frameworks, and analyze the allocation of resource wealth between domestic investment and foreign financial assets given capital scarcity and capacity limits. *Source: _082412 - 1. Fiscal Frameworks for Resource-Rich Countries (IMF chapter content).* ### 11. For RRDCs deciding on the tradeoff ### _082412 - 11. For RRDCs deciding on the tradeoff ### Frontloading consumption versus intergenerational smoothing - For a country on a typical development path, future generations are expected to have higher non-resource income than current generations; therefore an additional “unit” of consumption for the present generation has a higher marginal utility. - Some frontloading of consumption spending from a natural resource windfall may be welfare-improving. - Consumption rules based on the Permanent Income Hypothesis (PIH) or the bird-in-hand approach would not be optimal for such countries because: - PIH exhibits perfect consumption smoothing across generations (no frontloading). - Bird-in-hand allows only interest income from already extracted resources to be consumed and thus backloads consumption. - When standards of living are expected to rise over time, it is optimal to shift incremental consumption spending forward to benefit presently poorer generations. ### Optimal savings and investment from resource windfalls - To have a lasting impact on development, part of natural resource revenues needs to be saved and invested. - Optimal savings rates from resource windfall inflows are higher when returns on savings are higher and when the resource windfall is relatively short-lived. - Except for extreme examples, for there to remain any permanent consumption increment the savings rate would approach 100 percent of resource flows as the time-to-depletion date nears. - Intuition: income from saved resources grows and eventually fully covers consumption spending as resource flows dwindle, avoiding discrete jumps in the intertemporal consumption profile. - The PIH approach: sustain a constant consumption flow equal to the implicit return on the present value of future natural resource revenue; much of the revenue is saved to build non-resource assets whose returns sustain spending after extraction ends. - Limitations of PIH for RRDCs noted in the source: - Ignores that current generations may be relatively poorer than future ones (heterogeneous marginal utility). - Assumes no liquidity constraints, perfect capital mobility, and a single interest rate. - Assumes savings would be put into external financial assets, not domestic investment. - Does not take into account uncertainty (which would imply initially higher savings). ### Scaling up domestic investment and absorptive capacity constraints - Scaling up domestic investment financed by natural resource wealth is likely to be part of an optimal strategy for many RRDCs. - The decision on how much to consume and save/invest must be considered alongside where to invest; for RRDCs the optimal allocation is likely to have a significant domestic investment component because: - Capital-scarce developing countries can have high returns on capital. - Limited access to international capital markets and shallow domestic financial markets. - Plans to ramp up investment may reveal microeconomic bottlenecks: weaknesses in project implementation, project selection, and budgeting lower investment efficiency. - Boosting domestic spending may encounter short- to medium-term constraints: - Supply bottlenecks can push up prices of non-traded goods, creating inflationary pressures and possibly Dutch disease effects. - Domestic output response may be delayed because of the need to install more non-traded capital. - If bottlenecks are a concern, advisable policy is to take a gradual approach and save more of the windfall in financial assets, even if temporarily: - Temper non-traded consumption while domestic capital stock is being built up. - Park more windfall in a foreign asset development fund while investment capacity is built domestically. - “Investing in investment” — build capacity to manage investment and scale up public investment gradually in line with institutional and absorptive capacity constraints. - Sustainable investing can minimize commodity price volatility impacts, mitigate Dutch disease, and reduce costs of absorptive capacity constraints. ### Political economy, institutions, and fiscal commitments - Sound institutions are crucial: resource wealth can undermine institutions by promoting rent-seeking and corruption, risking dissipation of government savings and poor investment quality. - Resource-rich countries with stronger economic and political institutions tend to have better macroeconomic and growth performance. - Political economy and institutional challenges to scaling up public investment include: - Multiple powerful groups pushing for redistribution of a windfall when institutions are weak (the “voracity effect”). - Pressures to earmark investments to geographic areas where resources are extracted. - Investments by oil or mining parastatals and public-private partnerships in resource-for-infrastructure deals that are not integrated into the budget or not fully transparent. - Governments need commitment mechanisms (institutionalized savings rules) to support incentives for saving resource revenues; without them savings may be dissipated by successors. - Making fiscal commitments (e.g., fiscal responsibility laws, constitutional amendments) is difficult where enforcement mechanisms are weak. - RRDC-tailored fiscal frameworks and improvements in public investment management should be part of continuous institutional building and account for political economy constraints and incentives. ### Dealing with uncertainty and volatility in commodity revenues - Commodity price swings can be large, long-lasting (even permanent), and asymmetric, making it hard to forecast prices and to decide whether shocks are permanent or temporary. - Revenue volatility motivates saving for precautionary reasons: build a liquidity fund in good times to smooth consumption when inflows fall short. - The optimal size of a liquidity buffer increases when: - Revenue volatility is high and more persistent. - Society is more prudent (dislikes consumption swings more). - Consumption out of resource revenue is higher (because absolute consumption volatility is larger); this effect is more dominant for countries with long-lived resource flows. - Full self-insurance can be very expensive and hard to achieve; a pragmatic approach is to assess buffers based on a tolerable degree of tail-risk uncertainty using Value-at-Risk (VaR) or model-based approaches. - Market-based instruments (over-the-counter forward contracts, options) can be used to manage commodity price volatility but are relatively under-utilized by developing countries because they can be technically complex, costly, hard to communicate, and politically risky. - Uncertainty in the return on investment matters: risk-adjusted returns may be low or negative, which may slow the speed of ramping up investment spending and prompt investment in safer assets or debt repayment. - A holistic approach is required: balance consumption and savings, set aside a precautionary liquidity buffer, and use additional savings to pay down debt, ramp up domestic investment, or invest in external financial assets when absorptive capacity constrains faster domestic investment. ### Approaches to assess stabilization buffer adequacy (Box 3) - Value-at-Risk (VaR) approach: - Estimates the minimum required size of a stabilization buffer to absorb tail risk in resource revenue volatility, ensuring—with a given degree of confidence—that the buffer is unlikely to be fully depleted over the forecast horizon. - Buffer size depends on stochastic properties of revenue volatility (and shock persistence), the forecast horizon, the desired confidence level to avoid buffer depletion, and the budget rule for fund inflows and outflows. - Example application: Republic of Congo — an 8-year moving average of oil prices (5 historical years and 3 years forward projection) would strike a reasonable balance between oil price forecasting errors and reference price volatility. - VaR approach applied to Nigeria by Bartsch (2006). - DSGE model-based approach: - Links fiscal policy and the macroeconomy to determine the confidence that a spending path can be maintained given forecasted resource revenue volatility, while accounting for macroeconomic feedback effects and tradeoffs. - For a fiscal path, the fund is drawn down when the fiscal balance is in deficit; if fund balances are depleted, spending is cut to maintain fiscal sustainability. - Application to Angola: oil price paths simulated from historical distribution; a gradual investment scaling-up scenario compared to an aggressive scenario: - Aggressive scenario builds a smaller stabilization fund and yields about a 30 percent probability that the fund is inadequate to prevent future spending cuts, and a worse outcome for non-oil GDP due to volatile investment rates associated with lower investment returns. - Model-based approach has richer structure: more public investment can increase non-oil growth but imply less stabilization fund savings, leaving spending vulnerable to shocks; however, investment can generate more fiscal space by increasing non-resource revenue. ### Fiscal policy considerations (preview) - Fiscal frameworks for RRDCs need to ensure macroeconomic stability and fiscal sustainability and require appropriate fiscal institutions for transparent and efficient management of resource wealth. - Indicators should assess: (i) short-term fiscal stance (e.g., whether expansionary fiscal policy is leading to inflation and larger current account deficits) and (ii) solvency (government’s capacity to meet the intertemporal budget constraint). - Traditional fiscal indicators are often not adequate for RRDCs; focus should be on a broader set of indicators, paying particular attention to the Non-Resource Primary Balance (NRPB). *Source: IMF staff chapter "_082412 - 11. For RRDCs deciding on the tradeoff" (excerpt).* ### 26. In RRDCs these issues are further complicated by price volatility and the exhaustibility ### 26. In RRDCs these issues are further complicated by price volatility and the exhaustibility ### Price volatility and exhaustibility: fiscal challenges - Price volatility leads to revenue volatility and complicates fiscal planning; it requires fiscal rules to limit procyclicality by delinking expenditures from resource revenues. - Exhaustibility raises issues of sustainability and intergenerational equity and calls for smoothing government consumption over time, ensuring balanced growth and avoiding massive fiscal adjustment once resource wealth has been depleted. - The relative importance of these objectives varies by country circumstances, such as the degree of resource dependence and the reserve horizon, as discussed in section III.A. - Definition and thresholds provided in the chapter: - Reserve horizon: expected life of resource reserves given projected production levels; a common threshold for classifying countries as having a long reserve horizon is 30–35 years, or about one generation. - Resource-dependent: a country can be considered resource-dependent when it derives about 20 percent of its revenues from natural resources. ### Fiscal institutions and capacity needs - The fiscal framework needs support from appropriate fiscal institutions that affect: - capacity to undertake long-term revenue forecasts, - establishment of a medium-term orientation of the budget, - implementation of quality public investment projects, - management of special institutions, such as natural resource funds. - These institutional issues are discussed in sections III.B and III.C and illustrated by case studies (Supplement 1, Chapter III). ### Toolkit for analysis and policy design - The chapter provides a toolkit for staff and country authorities to analyze issues of sustainability and volatility smoothing, covering: - practical steps to assess long-term fiscal sustainability and to smooth short-term volatility, - tradeoffs involved in choosing fiscal targets and different levels of net wealth. - Supplementary materials referenced: - Supplement 2, Chapter I.B: Excel-based template to simulate effects of different fiscal rules. - Supplement 2, Chapter I.B: stylized case and further analysis; second phase of the project will refine templates and adapt them to specific country circumstances. ### Analytical framework: indicators and anchors - Fiscal framework for RRDCs should: - set out additional indicators on resource use, - adopt fiscal rules to manage short-term price volatility, - establish fiscal sustainability benchmarks. - Policy emphasis by reserve horizon: - Long reserve horizons: focus in short to medium term on managing revenue volatility and avoiding fiscal procyclicality. - Short reserve horizons: benchmark for fiscal sustainability that accounts for resource exhaustibility is a key concern. ### Non-resource primary balance (NRPB) as key indicator - For RRDCs with short reserve horizons, the key fiscal indicator is the non-resource primary balance (NRPB). - Rationale and properties: - NRPB identifies the impact of government operations on domestic demand because resource revenues typically originate abroad. - A higher non-resource primary deficit indicates an expansionary fiscal stance. - Setting policy on the NRPB helps delink fiscal policy from volatile resource revenues and links to sustainability frameworks in limited-reserve countries. - The overall fiscal balance can shift abruptly with resource price swings; such shifts may not reveal massive fiscal expansions after a revenue spike. - Advantages of NRPB: - Better assesses fiscal stance by excluding interest payments (important since many interest payments go to non-residents). - Facilitates analysis of long-term sustainability, particularly in countries with limited resources. - Complements: non-resource overall balance could supplement where interest payments related to domestic debt are large. ### Structural primary balance and price smoothing for long-horizon countries - In RRDCs with long reserve horizons, targeting a structural primary balance—defined as the primary balance excluding the cyclical component of resource revenues—is an important complement to the NRPB. - Structural primary balance = NRPB + structural component of resource revenues. - A smoothing rule delinks expenditures from externally-driven commodity price volatility. - Structural balance enables fiscal sustainability assessment similar to non-resource-rich countries. ### Policy guidance by country group - Countries with relatively short reserve horizons: - Should rely on the NRPB as a fiscal anchor. - Reasons: - Smoothing the overall balance rather than NRPB would require abrupt spending cuts when resources are exhausted. - Forward-looking markets could impose pressure well before resource depletion if large non-resource primary deficits persist. - NRPB rules are typically anchored around a sustainability benchmark and can be combined with expenditure growth or price-based smoothing rules. - Countries with long reserve horizons: - Face cyclical issues when resource revenues induce spending increases that generate large fiscal impulses relative to supply. - Sustainability issues arise when countries spend more than expected long-term resource revenues or fail to maintain buffers. - Targeting the structural primary balance is a useful approach. ### Non-resource primary balance rules: PIH and alternatives - Two PIH-consistent NRPB rule approaches (as possible benchmarks): - Bird-in-hand approach: NRPB set equal to the real rate of return on accumulated financial assets. - Traditional PIH: NRPB set consistent with accumulated and expected financial wealth by treating in-ground resources as “virtual” financial wealth and computing present value assuming an implicit rate of return. - PIH is excessively restrictive for many RRDCs; alternative sustainability frameworks are needed to: - allow scaling up of public investment relative to PIH, - determine optimal paths for public investment and NRPBs based on absorptive capacity and smoothing government consumption depending on cyclical position. - Tools and models: - Dynamic stochastic general equilibrium models, financial programming. - “FARI” cash flow model developed by IMF’s Fiscal Affairs Department (FAD) to forecast resource revenues (see Supplement 2, Chapter II.C, Box 2 and Daniel et al., 2010). ### Price-based smoothing rules: rationale and design tradeoffs - A price-based smoothing rule is suitable to compute structural resource revenues because: - As resource revenues form a larger part of fiscal revenues, excluding them (NRPB rule) becomes less intuitive and may misrepresent fiscal stance. - Price-based rules mitigate transmission of externally-driven resource price volatility and reduce procyclicality; they can support solvency by prudent under-projection of sustainable resource prices. - Reference price determination: - Two approaches: automatic formula or independent committee; automatic formulas are more common in developing countries due to limited institutional capacity. - Chile is an exception using an independent committee for medium- to long-term reference prices. - Tradeoff in price formula horizon: - Short backward-looking horizons better track price changes but produce more volatile spending envelopes. - Long backward-looking horizons smooth expenditures but may under- or over-shoot actual revenues if price trends change. - Example country specifications: - Mongolia: 16-year moving average of mineral prices (prices of the past 12 years and projected prices for the current and the next 3 years). - Mexico: weighted-average of the 10-year historical average of oil prices (25 percent weight), short-term futures price (50 percent weight multiplied by prudence factor of 0.84 determined on the basis of the standard deviation of oil prices), and medium-term futures prices (25 percent weight). - Trinidad and Tobago: simple average of oil prices for the last 5 years, the current year, and the futures prices for the next 5 years. - Ghana: projects petroleum revenues on the basis of a 7-year moving average of benchmark oil prices, including three projected years. ### Implementation notes and complementarities - Price smoothing formulas can be implemented as fiscal rules or as budgeting procedures to forecast resource revenues. - Complementary policies and considerations: - Structural balance approach does not by itself offer a direct link to sustainability benchmarks but supports prudent forecasting. - Domestic fuel subsidies are almost entirely procyclical with resource revenues and require separate reform attention. - Supplement materials provide templates, case studies, and model details (Supplement 1, Chapter III; Supplement 2, Chapter I.B). *INTERNATIONAL MONETARY FUND.* ### 41. The formula needs to be evaluated over time to make sure that it is generating an ### _082412 - 41. The formula needs to be evaluated over time to make sure that it is generating an ### Price formula, smoothing, and financial buffers - A price formula based on a slow-moving average smooths expenditure but can generate large discrepancies between projected and actual revenues. - For a given expenditure path, forecast errors will: - generate excessive savings when prices are rising fast; or - need to be absorbed by financial buffers when prices decline unexpectedly. - Buffers need to be larger when resource dependency is higher. - Example finding: VaR simulations for the Republic of Congo suggest that its buffers need to be sizable (e.g., 48 percent of non-oil GDP) to maintain a smooth government spending path over the medium term (see Supplement 2, Chapter III.A). ### Expenditure growth rules: design and trade-offs - Purpose: - Limit procyclicality. - Guide scaling up of public investment where absorptive capacity constraints exist. - Smooth volatility when combined with a price-based rule by setting floors and ceilings for expenditure growth. - Formulation options: - Limit growth of government spending in nominal terms, real terms, or as a percent of non-resource GDP. - Complementary frameworks: - More effective when combined with an overall balance rule (Peru example) or a structural rule (Mongolia starting in 2013). - Advantages relative to structural primary balance rule: - Generates a more predictable increase in spending. - Implementation considerations: - Adjustments to expenditure growth limits should be informed by an analysis of absorptive capacity. - Special treatment may be needed for growth-enhancing and priority spending (e.g., education and health). - Care should be taken to avoid fragmentation of the budget or creation of parallel budgets. - Country examples: - Botswana: Sustainable Budget Index approach stipulates that resource revenues are to be used for public investment and recurrent spending on health and education. - Peru: limit on current expenditure growth linked to growth of (non-mineral) GDP; limit on growth of capital expenditure was removed during the global financial crisis to promote expenditures with a higher multiplier. - Risks: - Incentives to camouflage recurrent expenditure as capital expenditure. - Many outlays classified as current spending can have significant capital formation-type effects (e.g., health and education). ### Setting sustainability benchmarks: objectives and approaches - Fiscal framework should be guided by assessment of fiscal sustainability: whether a government can sustain current spending, tax, and other policies in the long run without threatening solvency or defaulting on liabilities or expenditure commitments. - Particular relevance for countries with a relatively short reserve horizon; assessments useful for intertemporal fiscal savings decisions in countries with long horizons. - Assessments should: - Recognize uncertainty about the amount of reserves (new discoveries are made continually). - Utilize ranges or probabilities for the reserve horizon when possible. - Aim to maintain a smooth path of current expenditure to avoid difficult future consolidations. - Two longer-term approaches explored: - Modified Permanent Income Hypothesis (MPIH). - Fiscal sustainability framework (modified DSA), with differences discussed in Supplement 2, Chapter I.B. ### Modified PIH (MPIH): features and applications - MPIH allows front-loaded scaling up of investment by drawing down financial assets for a few years during the scaling up period, offset by future fiscal adjustment to rebuild financial assets to PIH levels. - Limitations: - Does not explicitly account for potential impact of scaling up on growth and non-resource revenues. - Dynamic outcomes: - If scaling up yields “fiscal returns” (increasing non-resource revenues), required future fiscal adjustment may be reduced or eliminated. - If higher public investment does not have lasting impact on growth, MPIH indicates potential need for future adjustment to avoid a permanent loss of wealth. - Application to Timor-Leste: - Government required to justify to parliament spending higher than a PIH benchmark. - Authorities are frontloading capital spending over the next two decades to improve infrastructure. - Institutions created for project appraisal, procurement, and monitoring within the budget process to improve investment management and justify MPIH use. ### Fiscal sustainability framework (FSF): features and applications - Explicitly incorporates the intertemporal budget constraint and the ex ante expected impact of higher investment on growth and non-resource revenues. - Can allow a drawdown of government wealth to build human and physical capital and stabilize net wealth at a lower level than the PIH or MPIH. - Lower financial wealth implies a lower stream of income to the budget than under PIH, which results in a higher NRPB consistent with fiscal sustainability. - Higher growth from investment can generate “fiscal returns” in the form of larger non-resource revenues, enabling stabilization at a higher spending level. - Net wealth stabilization level is country-specific. - Application to the Republic of Congo: - Simulated scaling up of investment sufficient to raise infrastructure capital stock to middle income country average, accounting for absorptive capacity and investment efficiency. - Finding: possible to scale up investment and ensure long-term fiscal sustainability because government wealth is stabilized in the post-scaling up period at about 400 percent of non-oil GDP, lower than current levels and than under the PIH. - Result: significantly higher per capita income growth (see Table 2 and Supplement 2, Chapter III.A). ### Comparative guidance on framework choice - Choice depends on assessed impact of public investment on growth and non-resource revenues. - If productivity of public investment is highly uncertain: MPIH may be more prudent. - If greater confidence in positive investment impact: FSF provides a better sustainability framework. - Sustainable investment tool (see Box 4) can inform alternative investment scaling up paths, accounting for full macroeconomic effects. ### The Sustainable Investment Tool (Box 4): purpose and use - Determines how much and how fast public investment can be scaled up while ensuring long-run sustainability (i.e., avoiding unfeasible future fiscal adjustments). - Links fiscal variables, investment, growth, and the real exchange rate; accounts for: - Inefficiencies translating public investment into public capital stock. - Absorptive capacity constraints. - Operation and maintenance budgeting requirements for larger capital stocks. - For a given investment scaling up path and envelope of resource revenues, the tool assesses long-term sustainability by evaluating implied fiscal adjustments in current government spending or tax rates required for debt sustainability. - If implied adjustments are unlikely to be feasible, the scaling up magnitude should be revised downward. - Also assesses growth sustainability: whether capital, non-resource GDP, and private consumption can be permanently higher relative to an initial state. - Country application examples: - Angola: compared “spend-as-you-go” approach to gradual investment scaling up paths; gradual scaling up allows building stabilization fund buffer and improving absorptive capacity and public investment efficiency, preventing disruption to investment when negative oil shocks occur (Supplement 2, Chapter III.B). ### Assessing the effectiveness of public investment - Tools and diagnostics: - Public Investment Management Index (PIMI) (Dabla-Norris et al., 2011) can evaluate which of four stages (project appraisal, selection, implementation, evaluation) is a bottleneck. - Cross-country estimates of growth effects of public capital can guide policymakers, including which public investment stage most impacts growth (e.g., Gupta et al., 2011). - Multilateral and bilateral project data (e.g., World Bank and donor projects) provide information on rates of return. - Importance: - Country-specific rate-of-return estimates are necessary when resource revenues are used to finance scaling up of public investment. - The fiscal frameworks discussed create demand for more and better information on public investment productivity and effectiveness. ### Selected quantitative indicators for Republic of Congo (Table 2) - Period columns: 2017 2032 2017 2032 (as presented in source) - Per Capita GDP (in U.S. dollars): 2,992 2,571 3,868 4,872 - Real GDP (annual percent change)1: -1.7 2.3 5.1 3.9 - Public Capital Spending (in percent non-oil GDP): 6.8 17.3 23.8 9.1 - Cumulative Capital Spending (in billions of U.S. dollars): 4.6 26.5 18.8 40.9 - Non-Resource Primary Balance (NRPB): -14.9 -14.9 -28.7 -3.5 - Net Financial Assets (in billions of U.S. dollars): 30.2 135.2 18.2 100.8 - Source as presented: IMF staff estimates. - Note: Data for 2017 report the average forecast of 2013-17, and 2032 report the average forecast of 2018-32. *Italic source attribution: Content extracted from the supplied IMF chapter/section PDF.* ### 50. How best to build productive assets may vary among RRDCs. Certain types of current ### _082412 - 50. How best to build productive assets may vary among RRDCs. Certain types of current ### Building productive assets in RRDCs - Certain types of current expenditure, such as education spending to build human capital, can yield returns similar to public investment and should be a high priority in some RRDCs. - Some capital investments (for example on hospitals and schools) cannot be productive without associated recurrent outlays on operations and maintenance. - RRDCs are heterogeneous: in fragile states, public spending on the security and justice sectors may have a growth return as high as building infrastructure. - For higher investment and the resulting growth to beneficially impact the NRPB, RRDCs must improve non-resource tax policy and administration. - There is evidence that rising resource revenues create disincentives for RRDCs to mobilize non-resource revenues (see Bornhorst, Gupta, and Thornton 2009). Failure to capture fiscal returns from higher growth would compromise the assessment of long-term sustainability. ### Indicators to track use of natural resource revenues - It is critical to put in place indicators to track the use of natural resource revenues because fungibility prevents a dollar-to-dollar link between resource use and capital expenditures. - Two simple indicators worth considering: - (i) the share of public investment in total spending (as a percent of non-resource GDP), and - (ii) the ratio of the increase in public investment to the increase in resource revenues (as a percent of non-resource GDP). - Expected patterns: - If resource revenues are expected to increase over time, the share of public investment in total spending should rise over time. - If resource revenues are expected to remain constant or decline, the challenge is to maintain the share of investment in total spending until major infrastructure gaps are closed. - The second indicator measures the extent to which additional resource revenues are used to expand capital spending. - Additional monitoring: - Track changes in public consumption (through the non-resource current balance) and the overall balance, in terms of the increase in resource revenues, to assess consumption and financial savings associated with increments in resource revenues. - Setting a baseline: - For countries with recent resource discovery, the appropriate baseline is the pre-resource period. - For mature resource-rich countries, three baseline options are: the pre-resource period, a pre-resource boom year (e.g., 2004 before the surge in oil prices began), or the current year (if the country is committed to following a new framework going forward). ### Fiscal institutions - RRDCs should establish well-designed fiscal institutions to support scaling up public investment while maintaining sound fiscal policies. - Important institutional elements include: - well-designed and transparent public financial management (PFM) systems; - special fiscal institutions, such as natural resource funds and independent forecasting bodies, to ensure prudent planning and utilization of resource revenues. - The PFM system should be sufficiently robust to: - provide reasonable forecasts for natural resource prices, production, and fiscal revenues and analyze risks related to the central scenario; - carry out medium-term budget planning; - facilitate investment project appraisal, selection, and implementation to ensure resource revenues, and other funding if any, support long-term economic development; - integrate cash and liability management to minimize financing costs and ensure a single route between the budget and any natural resource fund; - ensure transparency in the collection and utilization of natural resource revenues, and of other available resources, through appropriate fiscal accounting, reporting, and audit. - Legal design: - How much to codify in a fiscal responsibility law (FRL) or constitution depends on circumstances and legal/administrative traditions. - Best practice: be clear about objectives, institutions, and reporting arrangements for natural resource management and guard against over-prescription (particularly fixed amounts flowing into or out of funds) that could conflict with wider macrofiscal objectives. - Fiscal transparency and governance: - Emphasize fiscal transparency and good governance when establishing fiscal institutions. - Where political institutions are not relatively inclusive, scaling up public investment may be counterproductive because the budget process may not reflect broader social preferences. - Application of the code of good practices on fiscal transparency should be monitored closely, including clarity of roles and responsibilities, open budget processes, public availability of information, and assurances of data integrity. ### Managing natural resource funds - Purposes of natural resource funds inform asset management strategies: - Stabilization: insulate budget and economy from volatile commodity prices; - Savings: transfer wealth across generations or across time (e.g., pension funds); - Development: allocate resources to priority socioeconomic projects. - Principles and operational guidance: - Resource funds are complementary policy tools, not substitutes for fiscal policy. Rules governing flows between the budget and resource funds should not replace sound fiscal management. - Accumulation of financial assets in a fund for self-insurance and/or intergenerational objectives should be derived from actual fiscal surpluses and the government’s cash management strategy. - Resource fund flows should be integrated into the budget process; funds should not have independent spending authority and all inflows and outflows should go through the budget. - Funds are a key component of asset and liability management; design should consider the government’s fiscal, balance of payments, and financial objectives, including: - maintaining adequate liquidity to stabilize budget execution over time; - funding capacity adequate to finance future budgeted development projects; - financing buffers adequate to cover possible future longer-term liabilities. - Rules flexibility and withdrawal constraints: - Funds with flexible inflow and outflow rules tend to be more effective than those with fixed rules (e.g., linked to a threshold resource price or a proportion of resource revenues). - Example: Chile’s stabilization fund operates as the “mirror image” of the structural balance rule, receiving fiscal surpluses in boom years and supporting counter-cyclical policy in downturns. - Introduce “withdrawal brake” rules to limit depletion in any single year and protect funds from political pressure (example: São Tomé and Príncipe limits withdrawals to a maximum of 20 percent of accumulated assets in any single year). - Design by capacity: - Where institutional capacity is weak, maintain only one natural resource fund with two separate portfolios (one for stabilization and one for savings/development) and a well-specified asset management framework. - Pooling resources in a single fund helps minimize financing costs, maximize returns on pooled savings, and avoid complexities associated with multiple funds. - Two portfolios increase flexibility to cope with multiple financial objectives and foster transparency in purpose, investment objectives, and implementation. - Ensure asset allocation strategies are flexible enough to meet withdrawals for government liquidity needs without incurring higher day-to-day borrowing or other financial costs. - In RRDCs with well-developed institutional capacity, more than one fund could be set up to increase flexibility for multiple financial objectives, especially long-term savings goals, but requires careful design to avoid inconsistencies between asset-liability management and fiscal policy conduct. ### Short- and medium-term macroeconomic issues and policy coordination - Analytic framework: - The fiscal policy response determines the short-run impulse from a resource windfall; broader macroeconomic effects depend on monetary and exchange rate responses, especially reserve accumulation and the stance of monetary policy. - The fiscal response is measured by the extent of the decrease in the NRPB in response to higher resource revenue, ranging from spending the whole windfall (NRPB decreases by the full extent of the resource revenues) to saving the whole windfall (NRPB holds steady). - Higher public spending on local goods and services expands corresponding sectors, can lead to incipient inflationary pressures if absorptive capacity constraints exist, and causes an appreciation of the RER. - Fiscal smoothing rules can reduce aggregate demand pressures and limit real exchange rate pressures. - Interaction with monetary and exchange rate policy: - In managed floats, reserve accumulation ranges from zero to accumulating all foreign exchange from the windfall; the macro effect depends on whether accumulation is sterilized. - In fixed exchange rates, reserve accumulation is endogenous and responses range from no sterilization to complete sterilization. - Attempts by the central bank to limit appreciation by accumulating reserves may be justified by Dutch disease concerns or exchange rate overshooting, but can be counterproductive: - Non-sterilized interventions can add inflationary pressure; - Sterilized interventions can increase real interest rates and crowd out the private sector. - In fixed-rate regimes, equilibrium appreciation requires an increase in inflation; aggregate demand pressures become part of adjustment. - Case study — Nigeria: - The oil boom in 2004–07: relatively successful macroeconomic management attributed to an oil price-based rule and an oil stabilization fund, constraining spending, saving in the fund, and accumulation of reserves at the central bank — described as “limited spending, and significant reserve accumulation” (elements of scenarios III and IV.b). - Pressures on aggregate demand were limited and inflation fell during 2004–07. - In 2009–10, coordination broke down: as the oil-price rule and stabilization fund lost traction, higher fiscal spending, reserve loss, and loose monetary policy led to a period of “full spending and reserve loss” (scenario I), resulting in a rise in inflation and exchange rate depreciation pressures. - Financial sector and credit risks: - A resource windfall may result in a credit boom through increased appetite for domestic assets and capital inflows, feeding into domestic credit. - Credit growth can also stem from accommodating monetary policy or arise even if monetary policy is neutral. - While some credit expansion contributes to financial deepening, excessive credit growth can amplify aggregate demand pressures, exert inflationary pressures, and expose the financial system to reversals in foreign investor appetite and deterioration in credit quality. - Policymakers may tighten monetary policy in response to a credit boom but must consider unintended macroeconomic consequences (e.g., exchange rate appreciation). - The pace of government spending may need to be lowered to alleviate inflationary pressures. - Strengthened supervision and regulation are key to avoiding buildup of financial fragilities during a natural resource windfall. *Source: MACROECONOMIC POLICY FRAMEWORKS FOR RESOURCE-RICH DEVELOPING COUNTRIES (excerpts).* ### 69. Specific aspects of the economy and public finances at the onset of the windfall may ### _082412 - 69. Specific aspects of the economy and public finances at the onset of the windfall may ### Policy responses at the onset of a resource windfall - Countries starting with high inflation and fiscal dominance may use the windfall to reduce central bank financing of deficits. - Countries with weak or depleted policy buffers may prefer to use the windfall to build up reserves. - Countries facing incipient credit booms or busts at the onset of the windfall may wish to respond in ways that minimize the amplification of the credit cycle. ### Composition and speed of spending: short-term macro stability vs. development needs - Limited short-term fiscal spending can help contain aggregate demand pressures. - Scaled-up public spending to build physical and human capital addresses development needs in many RRDCs. - The high import content of infrastructure spending can help mitigate some short-term macro effects on the domestic economy. ### Policy coordination, reserve accumulation, and central bank considerations - Fiscal, monetary, and exchange rate policy coordination is important to ensure macroeconomic stability. - A more gradual and smooth fiscal response can limit the impact on inflation and the real exchange rate, facilitating the central bank’s task. - Efforts to build reserves (or other forms of external savings, e.g., in a SWF) are best supported by a prudent fiscal policy. - Policymakers must assess combined implications of fiscal, monetary, and exchange rate policies for policy objectives. ### Schematic policy response outcomes (as summarized) - Full spending with limited reserves accumulation: - The real exchange rate appreciates. - Aggregate demand pressures rise. - Domestic inflation is offset by nominal appreciation. - Positive spillovers to private demand. - Full spending with accumulation of limited reserves and managed float / savings in central bank: - The real exchange rate appreciates. - Monetary financing is reduced or real interest rates fall. - There are no additional inflationary pressures. - The private sector is crowded in. - Full sterilization (large reserve accumulation, active sterilization): - The real appreciation rate is reduced. - Real interest rates increase. - The private sector is crowded out. - Inflationary pressures rise (real appreciation acts as an escape valve). - No sterilization (fixed exchange rate, passive policy, no sterilization): - Real exchange rate appreciates (through a rise in inflation). - Inflation must increase. - Aggregate demand pressures rise. ### External sector assessments tailored to resource-rich producers - Traditional PIH consumption-smoothing frameworks are inadequate for capital-scarce RRDCs because they do not account for investment decisions. - The external sustainability (ES) approach computes the medium-term current account balance that stabilizes net foreign assets (NFA) and has been customized for resource-rich economies. - A new calibrated model-based approach incorporates investment decisions and RRDC frictions to inform current account (CA) norm analysis, and is applied to the CEMAC region. ### Model-based analytic tool: structure and scenarios - Core: neoclassical model of a small open economy with public and private investment, augmented by frictions—investment inefficiencies, absorptive capacity constraints, and limits to borrowing. - Five illustrative scenarios: - (i) high international capital mobility (PIH-type benchmark) - (ii) low capital mobility due to external borrowing constraints - (iii) borrowing and absorptive capacity constraints - (iv) borrowing constraints that can be relaxed after resource windfalls - (v) an expected adverse shock to oil output - For illustrative purposes, the initial resource windfall is assumed to be equal to 20 percent of GDP and gradually winds down over time. ### Key model findings on CA dynamics and investment - With external borrowing constrained: - Optimal response implies a smaller CA surplus compared to a PIH-type case. - Resource windfalls relax financing constraints, accelerating private and public investments, frontloading consumption, and boosting non-oil production. - With limited absorptive capacity: - Slower scaling up of investment is warranted, creating larger CA surpluses than when absorptive capacity is ample. - It may be optimal to consume more initially, accumulate less capital, and increase financial savings. - If future adverse oil shocks are expected: - Buffer-stock savings rationale leads to higher CA surpluses. - Consumption is lower before the shock; savings increase private and public investment and reduce external debt. - CEMAC application (simulated for 2011–16): - The calibrated benchmark CA has a surplus below what would be estimated by the external sustainability approach. - Reason: return on private and public capital is calibrated to be higher than the interest rate paid on foreign assets, making domestic investment optimal relative to saving abroad. - If higher capacity constraints or worse investment inefficiencies are assumed, a more gradual scaling up of investment is advisable, and CA surplus benchmarks would be higher (and the deficit smaller) than under base case assumptions. - Additional features affecting CA dynamics: - Commodity price volatility may call for precautionary savings, improving the CA balance. - Accumulation of mostly foreign-owned capital can make RRDCs more likely to run CA deficits; FDI and future royalty payments can worsen the CA balance. ### Implications for CA benchmark analysis and next steps - The analytic framework—accounting for optimal consumption and investment behavior and RRDC characteristics—yields CA benchmarks with lower surpluses (or higher deficits) after resource windfalls compared to a PIH-type framework, but absorptive capacity constraints can moderate these effects. - Next steps: implement additional country pilots and use experience to refine the tool. ### Lessons from Fund engagement with RRDCs - Review of Fund documents for RRDCs over the past decade finds relevant issues have been emphasized in surveillance, programs, and TA, but scope exists to enhance Fund policy advice on macrofiscal frameworks to manage resource revenue volatility and long-run fiscal sustainability. - In assessing longer-term fiscal sustainability: - A PIH-based framework was used in more than a third of RRDCs, with greater focus in countries (6 of 8) with high resource dependency. - Application of the PIH was geared to deriving a sustainable non-resource fiscal balance to anchor short- to medium-term frameworks. - In most instances, authorities’ projected spending exceeded the PIH-implied level; Fund advice was to bring spending down to the PIH level over the medium term. - Few countries adhered to the PIH framework; staff advocacy for it in RRDCs has been declining. - Other long-term fiscal policy frameworks (e.g., a debt rule) have rarely featured in Fund analysis and advice. - For the short to medium term: - Only about half of RRDCs received Fund advice to introduce some type of fiscal rule to smooth spending volatility. - Fund advice focused more on non-resource balance rules and less on price-based rules that explicitly smooth resource price volatility. - In practice, several countries use a resource reference price in their budget (40 percent of cases), but not in the form of fiscal rules (there are no deficit targets). - On institutional advice: - Fund advice emphasized building institutions to improve quality of spending financed by large resource revenues—PFM and MTEFs received the most attention. - Other institution-building (FRLs and resource funds) received less attention in Fund advice, though TA was provided to several countries in these areas. - Coverage of PFM issues in TA reports is similar in RRDCs and non-resource-rich peers, suggesting scope for better tailoring Fund advice to RRDC PFM challenges. *Source: _082412 - 69. Specific aspects of the economy and public finances at the onset of the windfall may (IMF PDF content provided).* ### 84. In RRDCs with Fund-supported ### In RRDCs with Fund-supported programs ### Fiscal conditionality and program focus - Overall, there was more fiscal conditionality in RRDCs than in non-resource comparators (Figure 16). - Conditionality in RRDCs focused on fiscal issues, particularly improving the quality of spending. - Specific emphasis areas included: - PFM (public financial management) - Expenditure reforms - Auditing and accounting - Fiscal transparency ### Revenue mobilization and TA - Strengthening capacity for both resource and non-resource revenue mobilization is important for RRDCs (Figure 17). - Until recently, conditionality in Fund-supported RRDC programs was less intensive in terms of revenue-enhancing measures relative to non-resource comparators. - Both RRDCs and comparators received similar levels of revenue-related TA, although resource-sector TA is being ramped up. - Because non-resource revenue ratios are lower in RRDCs than in comparators (Supplement 2, Chapter II.C; Bornhorst, Gupta, and Thornton 2009), more attention could be given to building up capacity to mobilize non-resource revenue (for instance, through TA). - Rationale: limiting long-term dependence on revenues from depleting resources is important, particularly for countries with short resource horizons, and because the “fiscal return” to scaled-up investment depends particularly on non-resource GDP growth dividends translating into more revenue. ### Topical Trust Fund (TTF) and TA transformation - The new multidonor Topical Trust Fund (TTF) began operations in 2011 and is transforming Fund TA to RRDCs. - To date, most country TA modules have been on the fiscal regime for extractive industries, including licensing and contracting. - Modules are being expanded into macrofiscal policies, PFM, expenditure policy, revenue administration, and natural resource asset and liability management. - The TTF supports 50 LICs and LMICs with substantial current or prospective hydrocarbon and mineral exploitation and concentrates on capacity building in five areas: (i) the fiscal regime; (ii) revenue administration; (iii) macrofiscal policies and PFM; (iv) asset and liability management; and (v) statistics. ### Strengthening Fund engagement and priorities - Scope to enhance Fund policy analysis and advice on: - Short-run fiscal rules to manage revenue volatility - Long-term fiscal sustainability - The Fund could do more to help RRDCs build necessary institutions, including fiscal responsibility laws. - Fund programs (together with TA) could place more attention on non-resource revenue mobilization. - The TTF is producing a welcome sea change in TA geared to managing exhaustible natural resources and building capacity. ### New approaches, tools, and policy recommendations - Main long-term goal: transform subsoil resources into other assets to support sustainable development; governments’ rate of saving from resource revenues should be high and rise over time as the resource is depleted. - Fundamental short- to medium-term priority: delink expenditure from volatile resource revenue and avoid procyclical fiscal policies. - Recommended instruments and approaches: - The “total spending” PIH framework is generally not appropriate for RRDCs where optimal strategy includes scaling up domestic investment; the new fiscal sustainability framework (FSF) that accounts for the growth impact of public investment offers a promising avenue for benchmarking long-run fiscal sustainability. - Scale up public investment sustainably while building capacity to alleviate absorption constraints (notably by improving PFM, including capacity for investment selection, monitoring, and ex post evaluation) and ensuring a permanently higher public capital stock. - Use the new model-based sustainable investment tool to inform policy choices on alternative investment scaling up paths and examine implications for reasonable overall rates of saving out of resource revenues and sustainable consumption trajectories; frameworks should require assumptions about expected investment returns and tax revenue benefits. - Complementary fiscal indicators that measure growth in public investment and financial savings in relation to growth in resource revenue could reorient policy discussions and help assess how much nonrenewable revenue is being consumed and how much saved domestically versus in foreign assets. - Non-resource balance and price-based fiscal rules are useful anchors to delink expenditure from volatile resource revenues; expenditure growth limits for current and capital expenditure can act as complementary “speed bump” targets. - A new Excel template for fiscal rules in RRDCs can be used to analyze practical steps for designing frameworks to smooth revenue volatility and assess long-run fiscal sustainability. - Value-at-risk analysis and model-based tools can help determine the necessary size of precautionary fiscal buffers to prevent significant cuts in investment and other spending if there are resource revenue shocks while investment is being scaled up. - Analytic frameworks highlight the need for coordination of fiscal, monetary, and exchange rate policies to manage the short-run macroeconomic impact of resource windfalls. - External sector assessments should account for public investment scaling up and the impact on private investment, with implications for CA dynamics and NFA positions after resource windfalls; a simple model-based external sustainability tool can complement current Fund approaches. ### Future work and planned pilots - Staff intends to create a practical tool kit to guide mission teams and country authorities, including strategies for TA and training; it should be flexible and tailored to country circumstances and explore links with the World Bank. - Planned further development and piloting: - Fiscal frameworks and rules: refine Excel templates, adapt to country circumstances, and pilot. - Complementary fiscal indicators: calculate and analyze indicators in a few country case studies (including a new resource discovery, a resource revenue windfall, and a non-boom revenue growth period for a mature producer); prepare operational guidelines for RRDC staff reports. - Sustainable investing tool: extend the model to allow financing investment by borrowing; pilot additional country applications (particularly for a country with a short reserve horizon); develop a user-friendly “front end” and internal training. - External sustainability model: undertake additional country applications, tailor the model to country-specific circumstances, and introduce uncertainty to analyze resource price volatility more systematically. - Additional planned analyses: - Examine the multidimensional and hard-to-quantify “absorptive capacity” concept and develop country-specific proxies. - Build a cross-country database for RRDC variables (for example, reserves and reserve horizon, actual and projected resource revenue by main component, non-resource GDP, and investment strategy of resource funds including strategic asset allocation characteristics and governance structures). - Further analyze short-run macroeconomic management challenges, such as the optimal size of stabilization funds and implications of policy mixes for volatility of key macroeconomic aggregates. ### Issues for discussion posed to Directors - Do Directors agree that distinct characteristics of RRDCs (e.g., credit constraints and capital scarcity) make traditional consumption-saving/investment frameworks inadequate? - Do Directors agree that it is optimal for RRDCs to save part of their natural resource revenues in domestic real assets, focusing on scaling up public investment to enhance productive capacity, and that governments should aim for a relatively smooth path of current spending to avoid abrupt consolidations in future public consumption? - Do Directors agree that the assessment of fiscal sustainability is important for all RRDCs and is especially critical for countries with short reserve horizons? Do Directors support the proposed fiscal sustainability benchmarks to guide possible public spending scaling up? - Do Directors support fiscal frameworks that seek to delink government expenditure from externally-driven volatility? - Do Directors agree that resource funds should be managed transparently within a properly formulated asset and liability management framework tailored to country circumstances and capacity levels, and that deposits and withdrawals from resource funds should be integrated in the budget? - Do Directors agree that external sector assessments should take into account the need for scaling up public investment? ### Appendix: Country groups and counts - Resource-rich developing countries (29): Angola; Bolivia; Cameroon; Chad; Dem. Rep. of Congo; Rep. of Congo; Côte d’Ivoire; Equatorial Guinea; Gabon; Guinea; Guyana; Indonesia; Iraq; Lao PDR; Liberia; Mali; Mauritania; Mongolia; Niger; Nigeria; Papua New Guinea; Sudan; Syrian Arab Republic; Timor-Leste; Turkmenistan; Uzbekistan; Vietnam; Yemen; Zambia. - Comparison group (63): Afghanistan; Armenia; Bangladesh; Belize; Benin; Bhutan; Burkina Faso; Burundi; Cambodia; Cape Verde; Central African Republic; Comoros; Djibouti; Dominica; Egypt; El Salvador; Eritrea; Ethiopia; Fiji; The Gambia; Georgia; Ghana; Grenada; Guatemala; Guinea-Bissau; Haiti; Honduras; India; Kenya; Kiribati; Kyrgyz Republic; Lesotho; Madagascar; Malawi; Maldives; Moldova; Morocco; Mozambique; Myanmar; Nepal; Nicaragua; Pakistan; Paraguay; Philippines; Rwanda; Samoa; São Tomé and Príncipe; Senegal; Sierra Leone; Solomon Islands; Sri Lanka; St. Kitts and Nevis; St. Lucia; St. Vincent & Grenadines; Swaziland; Tajikistan; Tanzania; Togo; Tonga; Uganda; Ukraine; Vanuatu; Zimbabwe. *Italic: Excerpted from the IMF chapter "MACROECONOMIC POLICY FRAMEWORKS FOR RESOURCE-RICH DEVELOPING COUNTRIES" provided in the source PDF.* ### Appendix 1. Table 1. Countries Rich in Non-Renewable Natural Resources Included in the Analysis ### Appendix 1. Table 1. Countries Rich in Non-Renewable Natural Resources Included in the Analysis ### Prospective natural resource exporting LICs/LMICs - Sierra Leone (SLE) — Type of Natural Resources: Diamonds; Gross National Income (GNI) Per Capita (in 2010 U.S. dollars): 340; World Bank Income Group: LIC; Human Development Index (2011): 0.34; Paved Roads (in % of total roads): 76; Extractive Industries Transparency Initiative (EITI) Status: Candidate. - Afghanistan (AFG) — Type of Natural Resources: Multidimensional; GNI Per Capita (in 2010 U.S. dollars): 410; World Bank Income Group: LIC; Human Development Index (2011): 0.40; Paved Roads (in % of total roads): 29; EITI Status: Candidate. - Madagascar (MDG) — Type of Natural Resources: Oil/gas; GNI Per Capita (in 2010 U.S. dollars): 430; World Bank Income Group: LIC; Human Development Index (2011): 0.489012; EITI Status: Suspended. - Mozambique (MOZ) — Type of Natural Resources: Gas/ bauxite, etc.; GNI Per Capita (in 2010 U.S. dollars): 440; World Bank Income Group: LIC; Human Development Index (2011): 0.328221; EITI Status: Candidate. - Central African Republic (CAF) — Type of Natural Resources: Diamonds/gold; GNI Per Capita (in 2010 U.S. dollars): 470; World Bank Income Group: LIC; Human Development Index (2011): 0.34; Paved Roads (in % of total roads): 80; Paved Roads (in % of total roads) footnote appears as 3; EITI Status: Compliant. - Uganda (UGA) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): 500; World Bank Income Group: LIC; Human Development Index (2011): 0.456523; EITI Status: Other. - Tanzania (TZA) — Type of Natural Resources: Gold & precious stones; GNI Per Capita (in 2010 U.S. dollars): 530; World Bank Income Group: LIC; Human Development Index (2011): 0.47; Paved Roads (in % of total roads): 88; Paved Roads (in % of total roads) footnote appears as 7; EITI Status: Candidate. - Togo (TGO) — Type of Natural Resources: Phosphate; GNI Per Capita (in 2010 U.S. dollars): 550; World Bank Income Group: LIC; Human Development Index (2011): 0.446921; EITI Status: Candidate. - Kyrgyz Republic (KGZ) — Type of Natural Resources: Gold; GNI Per Capita (in 2010 U.S. dollars): 840; World Bank Income Group: LIC; Human Development Index (2011): 0.622991; EITI Status: Compliant. - São Tomé and Príncipe (STP) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): 1,030; World Bank Income Group: LIC; Human Development Index (2011): 0.515768; EITI Status: Other. - Ghana (GHA) — Type of Natural Resources: Gold/oil; GNI Per Capita (in 2010 U.S. dollars): 1,250; World Bank Income Group: LMIC; Human Development Index (2011): 0.54; Paved Roads (in % of total roads): 54; Paved Roads (in % of total roads) footnote appears as 15; EITI Status: Compliant. - Guatemala (GTM) — Type of Natural Resources: Multidimensional; GNI Per Capita (in 2010 U.S. dollars): 2,740; World Bank Income Group: LMIC; Human Development Index (2011): 0.57; Paved Roads (in % of total roads): 30; Paved Roads (in % of total roads) footnote appears as 35; EITI Status: Candidate. ### Upper-middle income countries (UMICs) that are rich in natural resources - Ecuador (ECU) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): 3,850; World Bank Income Group: UMIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 55; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 24; Human Development Index (2011): 0.72; Paved Roads (in % of total roads): 13; Paved Roads footnote appears as 15; EITI Status: Other. - Albania (ALB) — Type of Natural Resources: Oil/gas; GNI Per Capita (in 2010 U.S. dollars): 3,970; World Bank Income Group: UMIC; Human Development Index (2011): 0.74; Paved Roads (in % of total roads): 4; Paved Roads footnote appears as 89; EITI Status: Candidate. - Algeria (DZA) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): 4,390; World Bank Income Group: UMIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 98; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 73; Human Development Index (2011): 0.70; Paved Roads footnote appears as ...; Paved Roads (in % of total roads): 73; EITI Status: Other. - Iran (IRN) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): 4,520; World Bank Income Group: UMIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 79; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 66; Human Development Index (2011): 0.71; Paved Roads (in % of total roads): 8; Paved Roads (in % of total roads) footnote appears as 73; EITI Status: Other. - Peru (PER) — Type of Natural Resources: Minerals; GNI Per Capita (in 2010 U.S. dollars): 4,900; World Bank Income Group: UMIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 8; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 19; Human Development Index (2011): 0.73; Paved Roads (in % of total roads): 15; Paved Roads footnote appears as 14; EITI Status: Compliant. - Azerbaijan (AZE) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): 5,380; World Bank Income Group: UMIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 94; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 64; Human Development Index (2011): 0.70; Paved Roads (in % of total roads): 8; Paved Roads (in % of total roads) footnote appears as 51; EITI Status: Compliant. - Botswana (BWA) — Type of Natural Resources: Diamonds; GNI Per Capita (in 2010 U.S. dollars): 6,750; World Bank Income Group: UMIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 66; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 63; Human Development Index (2011): 0.63; Paved Roads footnote appears as ...; Paved Roads (in % of total roads): 33; EITI Status: Other. - Kazakhstan (KAZ) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): 7,500; World Bank Income Group: UMIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 60; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 40; Human Development Index (2011): 0.75; Paved Roads (in % of total roads): 1; Paved Roads (in % of total roads) footnote appears as 90; EITI Status: Candidate. - Suriname (SUR) — Type of Natural Resources: Minerals; GNI Per Capita (in 2010 U.S. dollars): 7,640; World Bank Income Group: UMIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 11; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 29; Human Development Index (2011): 0.68; Paved Roads footnote appears as ...; Paved Roads (in % of total roads): 26; EITI Status: Other. - Mexico (MEX) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): 8,930; World Bank Income Group: UMIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 15; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 36; Human Development Index (2011): 0.77; Paved Roads (in % of total roads): 8; Paved Roads (in % of total roads) footnote appears as 35; EITI Status: Other. - Russia (RUS) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): 9,880; World Bank Income Group: UMIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 50; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 29; Human Development Index (2011): 0.76; Paved Roads (in % of total roads): 0; Paved Roads (in % of total roads) footnote appears as 80; EITI Status: Other. - Chile (CHL) — Type of Natural Resources: Copper; GNI Per Capita (in 2010 U.S. dollars): 10,750; World Bank Income Group: UMIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 53; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 23; Human Development Index (2011): 0.81; Paved Roads (in % of total roads): 2; Paved Roads (in % of total roads) footnote appears as 20; EITI Status: Other. - Venezuela (VEN) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): 11,660; World Bank Income Group: UMIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 93; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 58; Human Development Index (2011): 0.74; Paved Roads (in % of total roads): 10; Paved Roads (in % of total roads) footnote appears as 34; EITI Status: Other. - Libya (LBY) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): 12,320; World Bank Income Group: UMIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 97; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 89; Human Development Index (2011): 0.76; Paved Roads footnote appears as ...; Paved Roads (in % of total roads): 57; EITI Status: Other. ### High income countries (HICs) that are rich in natural resources - Bahrain (BHR) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): $24,710; World Bank Income Group: HIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 81; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 82; Human Development Index (2011): n.a.; Paved Roads: n.a.; EITI Status: Oher. - Brunei Darusalam (BRN) — Type of Natural Resources: Gas; GNI Per Capita (in 2010 U.S. dollars): n.a.; World Bank Income Group: HIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 96; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 90; Human Development Index (2011): n.a.; Paved Roads: n.a.; EITI Status: Oher. - Trinidad and Tobago (TTO) — Type of Natural Resources: Gas; GNI Per Capita (in 2010 U.S. dollars): $16,700; World Bank Income Group: HIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 38; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 49; Human Development Index (2011): 0.76; Paved Roads: n.a.; Paved Roads (in % of total roads) footnote appears as 51; EITI Status: Oher. - Saudi Arabia (SAU) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): $17,210; World Bank Income Group: HIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 87; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 79; Human Development Index (2011): 0.77; Paved Roads: n.a.; Paved Roads (in % of total roads) footnote appears as 21; EITI Status: Oher. - Oman (OMN) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): $17,890; World Bank Income Group: HIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 73; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 83; Human Development Index (2011): 0.71; Paved Roads: n.a.; Paved Roads (in % of total roads) footnote appears as 43; EITI Status: Oher. - United Arab Emirates (UAE) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): $26,370; World Bank Income Group: HIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 41; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 76; Human Development Index (2011): 0.85; Paved Roads: n.a.; Paved Roads (in % of total roads): 100; EITI Status: Oher. - Qatar (QAT) — Type of Natural Resources: Gas; GNI Per Capita (in 2010 U.S. dollars): 69,754*; World Bank Income Group: HIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 88; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 58; Human Development Index (2011): 0.83; Paved Roads: n.a.; Paved Roads (in % of total roads): 90; EITI Status: Oher. - Norway (NOR) — Type of Natural Resources: Oil; GNI Per Capita (in 2010 U.S. dollars): 84,640*; World Bank Income Group: HIC; Natural Resource Exports (in % of Total Exports, average, 2006–10): 62; Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): 29; Human Development Index (2011): 0.94; Paved Roads: n.a.; Paved Roads (in % of total roads): 80; EITI Status: Compliant. ### Footnotes and data sources (as presented) - Economies are divided according to 2010 GNI per capita, calculated using the World Bank Atlas method. The groups are: low-income: US$1,005 or less; lower-middle income: US$1,006–$3,975; upper-middle income: US$3,976–$12,275; and high-income: $12,276 or more. - Natural Resource Exports (in % of Total Exports, average, 2006–10) and Natural Resource Fiscal Revenue (in % of Total Revenue, average, 2006–10): Source: IMF staff estimates. - Paved Roads (in % of total roads) and Poverty Headcount: Refers to different years, depending on data availability. - Extractive Industries Transparency Initiative (EITI) Status: Source: EITI website, as accessed on July 10th, 2012. EITI categories: (i) EITI compliant-meeting all requirements in the EITI standard; (ii) EITI candidate-implementing EITI, not yet meeting all requirements; (iii) Suspended-compliant/candidate status is temporarily suspended; and (iv) Other-not implementing. - Prospective natural resource exporting LICs/LMICs: Countries with identified reserves where production has not begun or reached significant levels. *Italic source attribution line.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_082412.pdf_